Top Taiwan chip foundries brace for high-end slowdown

Source:Reuters Published: 2013-7-10 23:03:01

Taiwan's top foundries may need to rein in expectations for the second half of this year as high-end smartphone sales growth cools and chip buyers look to ship more low-cost, low-margin gadgets to emerging markets like the Chinese mainland.

The world's largest contract chip maker, Taiwan Semiconductor Manufacturing Co (TSMC), and its smaller cross-town rival, United Microelectronics Corp (UMC), both reported strong June sales on Wednesday, indicating second-quarter business had lived up to high expectations.

But the second half of the year looks tougher.

Contract chip makers that have been riding the explosive growth of mobile demand will have to depend more on mid- to low-end phones which use cheaper semiconductors, rather than high-end models like Apple's iPhone, placing greater pressure on margins.

Analysts warned that some chip buyers may start cutting back orders and working through existing stockpiles of semiconductors this quarter, which is traditionally a high season, slowing the momentum seen in the beginning of the year even though demand from the Chinese mainland is expected to stay strong.

"Samsung's Galaxy S4 and HTC One were both selling worse than expected so we may see an inventory correction in Q3. Chip makers are cautious about placing orders now," Hong Yi Chen, an analyst at Taipei-based IBTS Investment Consultation Co, told Reuters.

On Friday, both Korean and Taiwan smartphone vendors posted second-quarter earnings that lagged forecasts, deepening worries that the high-end smartphone market may have peaked.

TSMC Chairman Morris Chang said in April that the first and second quarters were stronger than usual due to solid mobile-related sales and surprisingly robust orders from the mainland.

Chang was still confident last month, telling reporters he expected record earnings per share this year and a better second half.

Certain clients and markets like the mainland were making up for softness elsewhere in the industry, he noted.

The company's clients include Qualcomm Inc, Texas Instruments Inc and Nvidia Corp. In turn, these firms sell chips to consumer electronics companies like South Korea's Samsung Electronics and Taiwan's HTC Corp as well as Apple.

"Individual vendors have some corrections - it's not industry-wide," said KGI Securities ­analyst Michael Liu in Taipei, adding that mid- to low-end markets remained healthy.

"The uptrend is still the same, just softer than previously expected."

TSMC is the top contract chip maker with 50 percent of the market, followed by Global Foundries with 12 percent and UMC with 10 percent, according to IT research company Gartner.